Homework Assignment #3 - 2nd Attempt - GRADED

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Feb 20, 2024

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Homework Assignment #3 -- Assertions, Analytical Procedures, and Audit Program Due Feb 10 at 11:59p.m. Points 29 Questions 19 Available Jan 14 at 12a.m. - Feb 10 at 11:59p.m. Time Limit None Allowed Attempts 3 Instructions You will have 3 attempts at Homework Assignment #3. NOTE: For the "tick-box" questions, marks are deducted for incorrect answers. Also, the number of marks for a question doesn’t necessarily correspond to the number of correct answers. Please be mindful of this. Take the Quiz Again Attempt History Attempt Time Score KEPT Attempt 2 30 minutes 28.6 out of 29 LATEST Attempt 2 30 minutes 28.6 out of 29 Attempt 1 132 minutes 25 out of 29 (@ Correct answers will be available on Feb 11 at 9a.m.. Score for this attempt: 28.6 out of 29 Submitted Feb 10 at 10:57p.m. This attempt took 30 minutes. Question 1 171 pts All payables listed are for valid purchases that have not yet been paid for.

What assertion is applicable in this situation? Account Balance - Existence Answer 1: Account Balance - Existence Question 2 1/1 pts Compute the “inventory” turnover ratio and compare it to the prior year, to the industry average, and to the budget. Take special notice if the current year ratio is much lower than the comparisons. What assertion is applicable in this situation? Account Balance - Accuracy, Valuation and Allocation Answer 1: Account Balance - Accuracy, Valuation and Allocation Question 3 1/1 pts Legal fees incurred throughout the year are recorded in “Professional Fees Expenses” and excluded from “Repairs and Maintenance Expenses.” What assertion is applicable in this situation? Class of Transaction - Classification Answer 1: Class of Transaction - Classification

Question 4 1/1 pts Obtain the client’s vendor invoice files and re-compute the client’'s FIFO cost for “inventory.” What assertion is applicable in this situation? Account Balance - Accuracy, Valuation and Allocation Answer 1: Account Balance - Accuracy, Valuation and Allocation Question 5 1/1 pts Recorded “sales” are for actual shipments made to legitimate customers. What assertion is applicable in this situation? Class of Transaction - Occurrence Answer 1: Class of Transaction - Occurrence Question 6 1/1 pts Enquire of the Warehouse Manager whether the company has any inventory in the warehouse that is on consignment from a vendor. What assertion is applicable in this situation? Account Balance - Rights Answer 1: Account Balance - Rights

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Question 7 1/1 pts Walk around the client’s storage room to ensure that all inventory has been included in the final inventory count. What assertion is applicable in this situation? Account Balance - Completeness Answer 1: Account Balance - Completeness Question 8 1/1 pts Amounts recorded in respect of payroll costs throughout the year have been recorded appropriately in the various functional expense line items on the income statement. What assertion is applicable in this situation? Class of Transaction - Classification Answer 1: Class of Transaction - Classification Question 9 1/1 pts The client acquired a new jet plane this year, which is included in “Property, Plant and Equipment.” Visit the location where the jet is located to ensure that it is physically present. What assertion is applicable in this situation? Account Balance - Existence

Answer 1: Account Balance - Existence Question 10 11/1 pts Ensure that proper disclosure has been made of the contingent liabilities. What assertion is applicable in this situation? Account Balance - Presentation Answer 1: Account Balance - Presentation Question 11 1/1 pts “Expenses” that were incurred just prior to year-end and just after year- end have been recorded in the proper period. What assertion is applicable in this situation? Class of Transaction - Cut- off Answer 1: Class of Transaction - Cut-off Question 12 2/2pts The purposes for performing analytical procedures during the planning phase (risk assessment phase) of the audit differs from the purposes for

performing analytical procedures during the testing/execution phase (risk response phase) of the audit. Which of the following is/are purposes for performing analytical procedures during the planning phase (risk assessment phase) of the audit? (NOTE: There may be more than one correct answer. An incorrect answer will result in a deduction.) Substantive procedure to assess the various accounts in the financial statements. To replace tests of details of balances for major account balances. Attention-directing -- highlight unusual or inconsistent fluctuations in accounts. To enhance the auditor's understanding of the client's business. To aid in the identification of risks. To assist in the performance of tests of controls. You have been assigned to the audit of Newport Production Inc. (NPI) financial statements as of and for the year ended December 31, 2022. NPI is a private company but it chooses to use IFRS. It is now July 2022. You are in the planning phase of the audit and are about to begin performing analytical procedures, as required by the CAS. The balance sheet and income statement are available in the attached file (open the separate Excel file below; notice that the Excel file has two (2) tabs). The following additional industry and client information is available: o NPI manufactures different types of put-it-together-yourself furniture. Competition in NPI's industry has increased in the past six months

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from foreign countries with lower material and labour cost. » |n the past six months, interest rates have been rising to curb inflation and this has led to general economic weakness, which has impacted NPI's operations. » NPI has obtained a new mortgage during the first half of 2022 in order to finance the purchase of new land and the construction of a building. The new mortgage agreement specifies new financial covenants such as a maximum “long-term debt-equity” ratio of 1.8 and a minimum “current ratio” of 4.0. » NPI has loosened its credit policy during the year, granting credit to customers with a lower credit score and also allowing customers to pay within 45 days instead of 30 days. o NPI’s business is not subject to seasonal changes but, as noted in (i) above, recent competitive pressures have impacted NPI. Separate Excel file: Assignment 3 - Newport Attachment 2022.xls (https:/lcanvas.ubc.ca/courses/129455/files/30575725/download? download_frd=1) REQUIRED In the next question, you will be asked to fill-in the blanks with your answers for the below table. NPI Industry NPI Prior Current yeo,++ Average Year Provide 1. Average our Accounts Y _ answer Receivable 29.502 30.958 in the turnover , next ratio ) question. Provide 9.964 10.052 your

2. Average answer Inventory in the turnover next Margin in the percentage next Provide your 6. Current answer Ratio in the next ratio question. Provide our 3. Days’ Y , answer Sales in ) _ in the Receivables next question. Provide our 4. Long- you answer term debt- equity ratio the aurty next question. Provide 5. Gross your Profit answer question. question. 12.372 12.604 1.62 0.82 25.00% 26.33% 4951 7.855 **Income statement amounts that were used in these calculations have been annualized (i.e. because the income statement amounts were for

the 6 months ended June 30, the amounts were multiplied by 12/6 in order to annualize the amounts. This simple annualization assumes that the client’s business is evenly distributed throughout the year, not seasonal). Question 13 6/6 pts This question is based on the "NPI" fact pattern above. Calculate the following for NPI's Current Year: e Record your answers in the boxes indicated o State your answer to each question to 2 decimal places (e.g. "21.56" or "67.00") e Do notinclude dollar signs or percentage symbols in your answers (Hint: if you aren't sure of the formula, you can refer to the formulas used in the Isa Manufacturing Class Example on page 3 of the Worksheet.) a) Average Accounts Receivable turnover ratio 1829 b) Average Inventory turnover ratio 9.65 c) Days' Sales in Receivables 20 d) Long-term Debt-Equity ratio 1.7/ e) Gross Profit margin percentage = 2897 f) Current Ratio 4-10

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Answer 1: 18.29 Answer 2: 9.65 Answer 3: 20 Answer 4: 1.77 Answer 5: 28.57 Answer 6: 410

NML Current Year 1. Average Accounts 18.29= Receivable turnover (9,800,000%70%%12/6)/((900,000+600,000)/2) ratio 2. Average Inventory 9.66= turnover ratio (7,000,000*12/6)/((1,600,000+1,300,000)/2) 3. Days’ Sales in _ 20 =365/18.293 Receivables 4. Long-term debt- _ _ 1.77=(550,000+2,400,000)/1,663,000 equity ratio 5. Gross Margin 28.57%=2,800,000/9,800,000 percentage 6. Current Ratio 4.101 = 2,510,000/612,000

Partlal Question 14 1.6/ 2 pts This question is based on the "NPI" fact pattern above. For purposes of this question only, assume the following data for NPI: NPI Current Year NPI Prior Year Industry Average Current Ratio 4.05 4.95 7.86 Based on this information, what auditor concerns do you have at the Planning Phase of the audit? Select all the statements below that are correct. Due to cross-default clauses on loans, it may be that the Term Loan would be called as well. This would be very problematic for the client such that the client may no longer be a going concern. We should closely monitor the account balances that form part of the covenant calculations. For example, we should be particularly careful about the completeness of Accounts Payable and other Current Liabilities. We should closely monitor the account balances that form part of the covenant calculations. For example, we should be particularly careful about the existence of Accounts Payable and other Current Liabilities. We should closely monitor the account balances that form part of the covenant calculations. For example, we should be particularly careful about the cut-off of Accounts Payable and other Current Liabilities. Since the Current Ratio is above the minimum current ratio covenant of 4.00 the auditor should not be concerned.

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Going concern assumption may not be valid. If the client falls under the minimum Current Ratio specified by the covenant, then the bank may call the Mortgage. NPI does not appear to have sufficient cash to repay the Mortgage, if it were to be called. There is a heightened incentive/pressure for management fraud/manipulation. The risk of a material misstatement due to fraud is higher. Question 15 2/2pts This question is based on the "NPI" fact pattern above. The Average A/R turnover ratio is often used to help an auditor to identify potential concern(s) with the Accounts Receivable account balance. For purposes of this question only, assume the following data for NPI: NPI Current | NPI Prior Industry Year Year Average Average A/R turnover _ 17.5 29.50 30.96 ratio Based on the information provided, what auditor concerns do you have regarding NPI's Accounts Receivable balance? Which statements below are correct regarding NPI's Accounts Receivable balance? Select all the statements below that are correct. We should plan to increase the "extent"of our audit procedures during the testing/execution phase due to this higher risk pertaining to the Valuation assertion of A/R. The "nature" and "timing" decisions are not significant in this circumstance.

This faster turnover likely reflects the loosened credit policy (45-day payment period, rather than 30 days). We would be concerned about the adequacy of Allowance for Doubtful Accounts. This relates to the Accuracy/Valuation/Allocation assertion for A/R. We should plan to increase/improve the “nature, extent and timing” of our audit procedures during the testing phase due to the higher risk pertaining to the Accuracy, Valuation, Allocation assertion of A/R. We would be concerned about the adequacy of Allowance for Doubtful Accounts. This relates to the existence assertion for A/R. A/R is turning over more slowly than in prior year and compared to industry average. We should plan to increase/improve the “nature, extent and timing” of our audit procedures during the testing phase due to the higher risk pertaining to the Completeness assertion of A/R. This slower turnover likely reflects the loosened credit policy. A/R is turning over faster than in prior year and compared to industry average. This slower turnover likely reflects the fact that higher-risk customers are being granted credit.

The next few questions will be based on the following fact pattern. Your client is Wireless Networking Limited (“WNL"), a private company with a year-end of December 31. WNL chooses to report under ASPE. Just prior to year end, on November 30, WNL acquired 1,000 common shares of Telus through a stock broker for a total cost of $40,000. As required by ASPE, WNL is required to account for its investment in Telus at fair value through profit/loss (FVPL). Assume that you are a junior auditor and you have been assigned to audit this investment in Telus. Assume that the reported amount on the balance sheet is $42,000. Question 16 2/ 2 pts This question is based on the WNL fact pattern above. Focus on the “existence” assertion. What are examples of “nature” of audit procedures that might be used by you to audit the “existence” of the investment as of December 31. (Select any procedures that are appropriate.) Check that the Telus shares are disclosed properly in the financial statements and notes. Review the broker statement at December 31 to ensure that all shares of Telus have been included in the reported amount on the balance sheet.

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Send a letter to WNL's broker to obtain a confirmation that WNL is holding 1000 shares of Telus at December 31. Review the broker statement at the date of purchase and verify the cost paid for the shares of Telus. Obtain the December broker statement and ensure that the client holds 1,000 common shares of Telus as of December 31. Question 17 2 | 2 pts This question is based on the WNL fact pattern above. What management assertions are applicable to this investment as of December 317 (Select any assertions that are applicable.) (Hint: there are 6) Existence Classification Presentation Completeness Cut-off Occurrence Accuracy, Valuation, Allocation Rights and Obligations

Question 18 2/ 2 pts This question is based on the WNL fact pattern above. Focus on the “accuracy, valuation and allocation” assertion. What are examples of “nature” of audit procedures that might be used by you to audit the “valuation” of the investment as of December 317 (Select any procedures that are appropriate.) Visit the Telus website or any other valid website to obtain the average stock price of Telus during the year. Inspect the share certificates of Telus held by WNL. Review the TSX (the Toronto Stock Exchange) website to verify the Closing trading price of Telus as of December 31. Confirm with the Broker the fair value of the Telus common shares as of December 31. Review the broker statement at the date of purchase and verify the date of the acquisition. Review the December broker statement, which normally shows the fair value of the stocks held by the client, to ensure that the stock price used by the client is correct (i.e. $42 per share).